Sunday, December 28, 2008
Wednesday, November 26, 2008
Another day, another $800 billion..............Ho hum.
We do notice that even the Obama Apostles of the MSM are questioning where the hell all this money is going to come from. They just haven't figured out that it's being done on purpose to crash the US financial empire. When they do figure it out, they'll happily report it as progress and then run a news package on the true humanitarians that staff soup kitchens.
I keep watch on the entertainment media as a way to distract myself from the political mess we're embroiled in. I notice films and videogames about zombies are enjoying a renaissance. Since entertainment outlets reflect their times, I'm wondering if future generations will make the assessment that the average American citizen, "Boobus Americanus" (BTW, that phrase was coined by Doug Casey, a man who is epochly smarter than 99% of America) is indeed a thoughtless zombie being led by the nose-hairs by the MSM and told what to feel by the entertainment mediums he adheres to. My colleagues at my place of employ certainly reflect a sort of "zombie subservience" to the prevalent collective thought. Regardless, we'll all be wormfood when the future historians pass judgement on our lame asses.
So dear readers, enjoy your Thanksgiving Feast you worked so hard to provide. Enjoy your family and friends; breaking bread with your fellow man is a sure way to bond with someone. Give thanks for the joys in your life and say a prayer in hope for the future. But mostly, give words of praise to our Founding Fathers who gave us 200+ years the world has never seen better of. Men who set the defining high mark for liberty and freedom. We owe them our endless gratitude.
The last 80 years have been highlighted with the effort to undo what they have done. The Republic is faultering, but still holding onto the greatest mass experiment in freedom the earth has known. Let's hope it holds out awhile longer...........pray it does for your children and grandchildren.
Sunday, November 16, 2008
Monday, November 10, 2008
Wednesday, November 5, 2008
November 4, 2008
MORE SIGNS OF A SILVER SHORTAGE
(This essay was written by silver analyst Theodore Butler, an independent consultant. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)
The evidence of a wholesale silver shortage continues to build. This is in addition to the current retail shortage. The continuing tightening in the price differentials between the trading months in COMEX futures has continued and become more dramatic.
One of the clearest indicators of a shortage in a physical commodity occurs when the nearby futures months trade at a premium to more deferred trading months. That means buyers are willing to pay more for a commodity because it is not immediately available. Remember, the definition of a commodity shortage revolves around delays and premiums. While the nearby months in COMEX silver futures haven’t yet grown to a premium over the more deferred months (called backwardation or an inverted market), they have moved noticeably in that direction.
A second sign was the unusual and persistent buying of the recently concluded October COMEX silver futures contract, which recorded almost 1300 contracts delivered (6.5 million ounces) for the month. The bulk of these contracts resulted in a removal of silver from COMEX silver warehouses.
Finally, the big silver ETF, SLV, reported a decline of around 4.5 million ounces over a two day period recently. It is impossible to tell whether declines in the metal holdings in the ETFs are due to investor share liquidation or if shareholders are removing metal for other purposes, such as industrial consumption. Looking at the share trading volume and price action for the period corresponding to this drop, I’m inclined to think it was due to removal, rather than liquidation. Recent reports of big inflows by air transport of silver from London to India seem to explain the declines in SLV more than investor liquidation. If I am correct, wholesale silver is a lot tighter than most assume.
The draw down in visible silver inventories coincides with a new theory that my mentor and friend, Izzy Friedman, conveyed to me a month ago. Izzy remarked to me then that if visible inventories stopped growing and began to decline, that might signal the silver crunch was at hand. At first, I tended to dismiss his new theory. But, after further contemplating his theory, I concluded he may be on to something.
Don’t Be Fooled
By Israel Friedman
(Israel Friedman is a friend and mentor to Theodore Butler. He has followed silver for many decades. He has written articles for us in the past. Investment Rarities does not necessarily endorse these views.)
Sooner or later the COMEX will close their doors for one reason only - they will be considered as only a paper exchange. I write this for those people who intend to take delivery on their futures contracts. Don’t bank on receiving actual silver for your contracts.
We have signs that the supply of physical silver is drying up. Investors are buying 1000 oz bars in quantity and the miners and smelters are cutting production. The two US banks were successful to bring low prices on the COMEX by destroying the mining industry, but you the physical investor will benefit from their actions.
I was reading a study that said that twenty years from now, due to growing global demand, we will need the equivalent of a new planet to supply us with the resources we will need. Today silver is closer to a shortage situation than ever, only the price doesn’t show it. If you have decided to invest in silver, think big. 1000 oz of silver in the long run will buy you a two bedroom apartment in Trump Towers.
My crystal ball tells me that when the users panic, don’t be surprised that the price of silver could double in a week, and we could reach $40 in less than two months, and move quickly to $100, only because there is no silver available.
Be careful, those who have certificates from COMEX, don’t deliver your contracts for paper futures contracts no matter how attractive the spreads become. Don’t give real silver for paper obligations. It is not sure if your paper contract will be worth more than the paper it is printed on. Learn that one bird in the hand is worth more than ten birds on the tree. It is better to have 1000 oz in your hand than 10,000 oz in paper futures contracts.
It’s time to be very careful. These moderns gangsters are looking for ways to trick you by discouraging you from buying silver or to swindle you out from the silver you already own, by offering you many goodies like backwardation, leasing your silver with high interest rates and many other tricks. The organizations will offer you all the guarantees in the world for your silver, but remember, they can’t do that legitimately because there is less and less silver in the world.
Hold your silver close to your heart and remember that the real gold is silver. When the price of silver is equal to the price of gold, then think of profit taking. If you don’t have silver, you won’t be able to take profits.
WHY THE SILVER USERS WILL PANIC
By Theodore Butler
(This essay was written by silver analyst Theodore Butler, an independent consultant. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)
An integral component of my analysis has been that, as the inevitable shortage of wholesale silver became apparent, the industrial users would panic and attempt to build inventories of physical metal. Faced with prolonged delays of a material that threatened to shut down their production lines, the users would rush to buy enough physical silver to prevent those shut downs. This would provide a bullish price thrust that few comprehend.
Recently, I had an experience that may drive home why the silver users will panic and why that will cause the price of silver to explode. About a month ago, I drove home to Florida from Maine. Normally, I take a slightly longer, but more scenic route, than the straight run down I-95. This year, because I was sensitive to reports of gasoline shortages along the route I normally take, I swung over to I-95 further north than I usually do, to avoid any problems getting fuel. It seemed that Hurricane Ike and pipeline problems were causing gas shortages throughout the Southeast U.S.
Having navigated successfully over to I-95 (over much pouting and resistance from my wife, a strong proponent for the scenic route), I thought I was headed home gas-worry free. However, at a rest stop in South Carolina, a traveler approached me with the warning that gas was now a problem on I-95. He related to me that he just came from a gas station that was sold out and had heard that there "was no gasoline at all in Georgia." Georgia was still 100 miles ahead, and there is no other way to get to Florida.
Since I had less than half a tank of gas, I decided to fill up at the next gas station. Sure enough, that station had long lines and the dreaded plastic bags over many of the fuel nozzles, indicating empty tanks for premium and mid-grade gas. Fortunately, my car only requires regular gas, so I was able to fill up with no great difficulty.
I must tell you that such an experience wakes you up and focuses your attention on something you normally take for granted. I confess that 75 miles down the road, in stopping at a hotel for the evening, I pulled into an empty gas station and topped off my tank with 2 gallons. I wanted to get home.
It occurred to me that it didn’t matter if your vehicle was worth $1000 or a hundred times that amount; without fuel, it was of no use. You need fuel to run your car. Same thing with silver for an industrial consumer - your $100 million factory could grind to a halt without silver.
I related to my wife that the price of a gallon of gas was no longer a concern, only its availability. If there was a way to insure a guaranteed supply of gas for the next year or so, I would sign up. But that’s impossible, as the problem was that there was no practical way of storing such a supply, as we are all limited by the capacity of our vehicles’ fuel tanks. Where would you put 1000 gallons of gasoline?
It occurred to me that there was no practical way for anyone to hedge against a shortage of fuel, save build your own tanks to store the fuel. Even those that had successfully hedged the price of fuel in the past, like Southwest Airlines and others, were hedging against just the price and couldn’t guarantee themselves actual supply in a shortage. For fuel and many other commodities, there was no practical protection against a shortage of the commodity.
That’s when it dawned on me to write this article. Silver is a lot different than fuel in that not only is it a lot easier and less dangerous to store, it is more likely to go into a shortage, given silver’s investment demand. Not only could the silver industrial consumers hedge themselves against the giant silver price increases ahead (buying futures), they could easily guarantee actual supplies before the coming inevitable shortage. All the users have to do is buy actual silver, not paper contracts, but real silver. Just like you do. The users buying actual silver to protect against both price increases and availability is as easy as falling off a log. Plus, it is a very rational act.
The silver industrial users have yet to initiate any type of buying protection program, either with paper contracts or with the actual metal. But, the users are run by people who are human. When they can’t get timely delivery of actual silver, like what has occurred to investors for the past months, they will do what I did in North Carolina; they will top off, and keep topping off. Only they won’t be limited by a 15-gallon gas tank. Because of the physical nature of silver and its ease of storage, the users will be able to buy as much silver as they care to, price permitting. They will buy more silver than they need because they will fear not being able to get it, once the delays in shipments start. This will set off a chain reaction, exacerbating the shortage and causing more silver users to do the same thing. This chain reaction will set off a price spiral that will shock the world.
The most recent Commitment of Traders Report (COT) indicated a market structure that supports a strong move to the upside in silver and gold. While there was no improvement in the latest COT for silver despite strong downside price pressure during the reporting week, I believe that is due to the washed out condition of the market. How much blood (long liquidation) can you get out of a stone?
In gold, however, there was a dramatic cleansing of speculative longs and even notable speculative new short selling. This enabled the commercials to buy many gold contracts. I believe gold is now as washed out as silver. In more measurements than not, both the gold and silver market structure is as good as it has been in years. That means low downside and large potential upside.
I read an article today in the Idaho Statesman concerning layoffs at a local silver mine, due to the low price of silver. I took the occasion to write the following e-mail to various officials at the CFTC -
From: email@example.com To: firstname.lastname@example.org email@example.com Bcmailto:Chilton@cftc.gov firstname.lastname@example.org email@example.com mailto:firstname.lastname@example.org Cc: email@example.com Sent: Tue Nov 04 05:34:33 2008Subject: silver manipulation
While you dot i's and cross t's, and look for ways to look the other way, instead of doing what you know you should be doing, here's a tiny sliver of the harm you are causing to innocent bystanders. You are directly responsible for these people losing their jobs and for the pain and stress it is bringing to their families. You should be ashamed of yourselves for allowing this crime in progress to existhttp://www.idahostatesman.com/business/story/559426.htmlTed Butler
Revenge of the Left across the world
Whatever the exact result of the US elections tomorrow, we must assume that the whole governing machinery of Washington and the state capitols will soon be hostile to laissez-faire thinking.
By Ambrose Evans-PritchardLast Updated: 11:27AM GMT 04 Nov 2008
It is not just that the Democrats will win a crushing victory in both houses of Congress, perhaps reaching the 60-seat Senate threshold that lets them steam-roll legislation. It is also that the incoming class of 2008 is of a new creed. Many no longer believe – or actively reject – the free trade and free market catechisms.
As commentator Markos Moulitsas put it in Newsweek: "The big question is, will Democrats nationwide simply 'win' the night–or will they deliver an electoral drubbing so thorough that it signals the utter rejection of conservative ideology and kills the notion that America is a 'center-right' country?" he said.
No matter that statist policies were responsible for this global crisis in the first place. It was Western governments that set interest rates too low for too long, encouraging us all to abuse credit.
It was Eastern governments that held down their currencies to pursue mercantilist trade advantage, thereby accumulating vast foreign reserves that had to be recycled. Hence the bond bubble. This is the deformed creature known as Bretton Woods II. Protectionist Democrats are right to complain that the game is rigged. Free trade? Laugh on.
But at this point I have given up hoping that we will draw the right conclusions from this crisis. The universal verdict is that capitalism has run amok.
In any case the damage caused as credit retrenchment squeezes real industry is likely to be so great that Barack Obama may have to pursue unthinkable policies, just as Franklin Roosevelt had to ditch campaign orthodoxies and go truly radical after his landslide victory in 1932. Indeed, Mr Obama – if he wins – may have to start by nationalizing the US car industry.
For those who missed it, I recommend Edward Stourton's BBC interview with Eric Hobsbawm, the doyen of Marxist history.
"This is the dramatic equivalent of the collapse of the Soviet Union: we now know that an era has ended," said Mr Hobsbawm, still lucid at 91.
"It is certainly greatest crisis of capitalism since the 1930s. As Marx and Schumpeter foresaw, globalization not only destroys heritage, but is incredibly unstable. It operates through a series of crises.
"There'll be a much greater role for the state, one way or another. We've already got the state as lender of last resort, we might well return to idea of the state as employer of last resort, which is what it was under FDR. It'll be something which orients, and even directs the private economy," he said.
Dismiss this as the wishful thinking of an old Marxist if you want, but I suspect his views may be closer to the truth than the complacent assumptions so prevalent in the City.
To those who still think that business can go on as normal now that EU taxpayers have had to rescue the financial system, I can only say: what will happen to London if EU exchange controls are imposed, or if leverage is restricted by draconian laws – as demanded by the German, Dutch, and Nordic Left?
Does the UK still have a blocking minority under EU voting rules to stop a blitz of directives that could shut down half the activities of the City – or the 'Casino' as they say in Brussels? I doubt it.
Who thinks that the three key Commission posts – single market, competition, and trade – will still be held by free marketeers when the new team comes in next year?
In Germany, Oskar Lafontaine's Linke party now has 23pc support in Saarland on a Marxist pledge to nationalize banks and utilities. Needless to say, the Social Democrats (SPD) are shifting hard Left to protect their flank.
"The rule of the radical market ideology that began with Margaret Thatcher and Ronald Reagan has ended with a loud bang," said Frank-Walter Steinmeier, Germany's foreign minister and SPD candidate for chancellor next year.
"We need a comprehensive new start, so we can reestablish our society on fresh foundations. People create value, not locusts," he said.
France has its own Gaullist version on this, seizing on the crisis to launch the most far-reaching strategy of state intervention since the 1970s.
"Laissez-faire, c'est fini," said President Nicolas Sarkozy. "We will intervene massively whenever a strategic enterprise needs our money."
Such language can now be heard daily across Europe. It can only intensify as the fall-out from the EU's €1.8bn trillion (£1.4 trillion) bank rescue becomes clearer, and as Europe's elites discover that their own banks are the most leveraged in the world and have played their own Wagnerian part in Gotterdammerung.
European and UK banks are five times more exposed to emerging markets than US banks. They alone hold the collective time-bomb of $1.6 trillion (£990bn) in hard currency loans to Eastern Europe – now starting to detonate in Hungary, Ukraine, Romania, and even Russia.
At some point, Europe's political class will face the awful truth that their own credit bubbles are just as bad – and perhaps worse – than the excesses of US sub-prime property. As that occurs, the shock will move by degrees from revulsion to political rage.
Professor Hobsbawm, who spent his youth watching Hitler's rise in Berlin, has a warning for those who think this will help the Left in any recognizable form. "In the 1930s, the net political effect of the Depression was to enormously strengthen the Right," he said.
America was the great exception, as it may prove to be again. I for one will take the enlightened "socialism" of Barack Obama any day over the Hegelian broth nearing the boil in Europe.
Ludicrous CNBC anchor tells economic expert “Gold has no inherent value”, describes dire financial warnings as “fun”
Friday, October 31, 2008
There is no such thing as a tax on just the rich. Taxes on wealthy people affect everyone.
Remember, Obama defines anyone making over $90,000 a year as "rich."
Joe the plumber discovered that Obama thinks Joe's rich too. Under Obama, he won't be able to hire new employees and grow his business.
Joe's not alone. Obama says he'll strip away the FICA cap at $90,000 for every worker. That means every dollar you earn over that amount, you'll pay 7 percent!
Obama Lie No. 2 — I want to give a tax cut to the middle class.
Obama says he will let the Bush tax cuts expire. That's an automatic 5 percent (maximum) tax increase on almost all taxpayers.
Plus middle class folks pay capital gains taxes. Obama has said he wants to almost double them from a low of 15 percent to almost 30 percent.
He wants to hike the dividend tax, and he also has promised taxes on gas and energy.
Obama also wants to dramatically increase the estate tax, which had almost disappeared. There goes your idea of sharing your wealth with your kids in the future.
Obama Lie No. 3 — I want to make America more secure.
Another outright lie.
In an age when crazies like Iran's Ahmadinejad are building ballistic missiles and promise to "destroy" the United States and Israel, Obama has promised to gut the missile defense program created by President Reagan.
"I will cut investments in unproven missile defense systems," Obama said.
He has promised to cut "tens of billions" of dollars from the Defense Department. In an effort to make us more "secure," Obama plans to disarm us.
He is a radical out to reshape America beyond recognition.
He is so radical he even backed driver's licenses for illegal aliens — even though such a move would help future terrorists move freely in the United States.
Even Hillary Clinton opposed his radical plan.
But Obama not only touted such a plan running for president, he pushed for giving illegals driver's licenses as a state senator in Illinois.
He is also the most pro-abortion candidate in the history of the country. In 2001, as a state legislator in Illinois, he opposed a bill to protect live-born children — children actually born alive! He was the only Illinois senator to speak out against the bill.
He opposes gun rights. He has long history of trying to deny ordinary citizens access to guns.
He originally backed Washington D.C.'s total ban on private handguns — a ban that was overturned. The NRA rated him an "F" on gun positions and says he is one of the most dangerous anti-gun politicians in the nation.
Never forget that Obama is a Harvard-educated elitist. To him, we Americans are simply "bitter" and he has mocked us saying "[they] cling to their guns and their religion."
Barack Obama’s senior advisers have drawn up plans to lower expectations for his presidency if he wins next week’s election, amid concerns that many of his euphoric supporters are harbouring unrealistic hopes of what he can achieve.
The sudden financial crisis and the prospect of a deep and painful recession have increased the urgency inside the Obama team to bring people down to earth, after a campaign in which his soaring rhetoric and promises of “hope” and “change” are now confronted with the reality of a stricken economy.
One senior adviser told The Times that the first few weeks of the transition, immediately after the election, were critical, “so there’s not a vast mood swing from exhilaration and euphoria to despair”.
The aide said that Mr Obama himself was the first to realise that expectations risked being inflated.
In an interview with a Colorado radio station, Mr Obama appeared to be engaged already in expectation lowering. Asked about his goals for the first hundred days, he said he would need more time to tackle such big and costly issues as health care reform, global warming and Iraq. “The first hundred days is going to be important, but it’s probably going to be the first thousand days that makes the difference,” he said. He has also been reminding crowds in recent days how “hard” it will be to achieve his goals, and that it will take time.
“I won’t stand here and pretend that any of this will be easy – especially now,” Mr Obama told a rally in Sarasota, Florida, yesterday, citing “the cost of this economic crisis, and the cost of the war in Iraq”. Mr Obama’s transition team is headed by John Podesta, a Washington veteran and a former chief-of-staff to Bill Clinton. He has spent months overseeing a virtual Democratic government-in-exile to plan a smooth transition should Mr Obama emerge victorious next week. The plans are so far advanced that an Obama Cabinet has been largely decided upon, with the expectation that most of his senior appointments could be announced shortly after election day.
Yet Mr Obama and his aides are under no illusions about the size of the challenges the Democrat will inherit if he enters the Oval Office. Tom Daschle, the party’s former leader in the US Senate and a strong contender for the post of White House chief-of-staff in an Obama administration, said last month that the winner next week would have only a 50 per cent chance of winning a second term in 2012.
Not only will the next president take office with the country sliding into a potentially long recession — and mired in debt — but the challenges abroad are immense. There is an unfinished war in Iraq, a worsening situation in Afghanistan and an unstable and nuclear-armed Pakistan to contend with. Iran appears intent on acquiring the bomb and there remains the ever-present threat from al-Qaeda and Islamic extremists.
If he wins, Mr Obama will inherit a Democratic-controlled Congress, and might even have the benefit of a 60-seat filibuster-proof “supermajority” in the Senate. Such a scenario would allow him to push through legislation largely unfettered by Republican opposition. Yet it also means that should the country still be mired in recession in three years’ time, voters — who have short memories — will probably blame him and the Democrats on Capitol Hill. Those stakes have led Mr Obama to conclude that while expectations need to be tempered, big things need to be achieved very early in his first term, when he will still have the political capital to achieve some of his most ambitious legislative goals.
Having promised “real” change, the pressure will be on him to deliver. In the Colorado interview, Mr Obama added: “The next president has got to come quickly out of the box.”
The early priorities being lined up if he takes power are a mixture of symbolism and substance. He plans to make a major address in a big Muslim country early in his first term. Having pledged on the campaign trail to close Guantanamo Bay, he is also determined to make early moves to rid America of the controversial prison. Yet what to do with the remaining inmates looms as an intractable problem, as many of their home governments refuse to allow them to return.
Mr Obama’s first legislative goals will be to follow through on his pledge to cut taxes for the middle class and raise them for the wealthiest Americans, and to push through a hugely expensive Bill to provide near-universal health insurance.
Quote of the Week'I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, - the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.
Do you own gold yet?
During the last market rout, the price of gold plunged from $900 an ounce to $690 an ounce. The talking heads, seeing this, announced that gold is no longer a safe haven or a storehouse of value.
The idea that gold has somehow lost its safe haven qualities due to a temporary drop in price is beyond idiotic. To claim this is to ignore the role gold has played for well over five millennia. What are the odds that this has suddenly changed?
No, this recent drop in gold has come almost entirely from downward pressure in the “paper” gold markets—the COMEX and Gold ETF (GLD). And this downward pressure has come from two trends:
The dollar’s rally
Hedge funds, pension funds, and even mutual funds have been slammed with redemptions in the last year—mutual funds alone have experienced $967 billion in redemptions since the beginning of 2008.
In order to meet these redemptions, funds have resorted to liquidating portions of their portfolios. Gold—which the stock-centric crowd never really believed in anyway—was one of the first items to go. And since the “paper” gold market is relatively small—the total value of gold on the Commodity Exchange in New York (COMEX) is roughly $5 billion—it doesn’t take much capital to crush gold in the “paper” markets.
As for the dollar’s rally, the Feds’ interventions and hyperinflationary money printing will put an end to this sometime in the not so distant future. You can’t add $6 odd trillion in liabilities to the US balance sheet, start trading in un-secured commercial paper markets—as the Fed did with its TARP facility—and increase the monetary supply at an annualized rate of more than 300%—the pace of money printing maintained by the Feds during the last month—and NOT kick the dollar in the face.
No, the dollar rally will end sooner rather than later. When it does, the last obstacle standing between a raging Bull market in gold and gold mining shares will have been removed.
Speaking of miners…
While gold has been hammered, gold mining stocks, particularly juniors, have been truly creamed. The explanation here is much the same as for gold: liquidations. However, while the gold paper market may be roughly $5 billion, gold juniors as individual plays are even smaller. So it takes even less money to beat these stocks down.
Because of this, today, gold mining stocks are currently trading at levels you only see at the end of BEAR markets. Taken as a whole, the sector is at its second cheapest level relative to the price of gold since 1984.
It’s an absurd situation. Gold is undergoing a correction during a bull market… while gold miners— basically real estate companies sitting atop gold—are trading as if they just ended a bear market in gold. This won’t last forever. At some point both the institutional liquidations and the dollar’s rally will end. When they do, gold miners will explode upwards.
The US bail-out amounts to a strings-free, public-funded windfall for big business. Welcome to no-risk capitalism
In the final days of the election many Republicans seem to have given up the fight for power. But don't be fooled: that doesn't mean they are relaxing. If you want to see real Republican elbow grease, check out the energy going into chucking great chunks of the $700bn bail-out out the door. At a recent Senate banking committee hearing, the Republican Bob Corker was fixated on this task, and with a clear deadline in mind: inauguration. "How much of it do you think may be actually spent by January 20 or so?" Corker asked Neel Kashkari, the 35-year-old former banker in charge of the bail-out.
When European colonialists realised that they had no choice but to hand over power to the indigenous citizens, they would often turn their attention to stripping the local treasury of its gold and grabbing valuable livestock. If they were really nasty, like the Portuguese in Mozambique in the mid-1970s, they poured concrete down the elevator shafts.
Nothing so barbaric for the Bush gang. Rather than open plunder, it prefers bureaucratic instruments, such as "distressed asset" auctions and the "equity purchase program". But make no mistake: the goal is the same as it was for the defeated Portuguese - a final, frantic looting of the public wealth before they hand over the keys to the safe.
How else to make sense of the bizarre decisions that have governed the allocation of the bail-out money? When the Bush administration announced it would be injecting $250bn into US banks in exchange for equity, the plan was widely referred to as "partial nationalisation" - a radical measure required to get banks lending again. Henry Paulson, the treasury secretary, had seen the light, we were told, and was following the lead of Gordon Brown.
In fact, there has been no nationalisation, partial or otherwise. American taxpayers have gained no meaningful control over the banks, which is why the banks are free to spend the new money as they wish. At Morgan Stanley, it looks as if much of the windfall will cover this year's bonuses. Citigroup has been hinting it will use its $25bn buying other banks, while John Thain, the chief executive of Merrill Lynch, told analysts: "At least for the next quarter, it's just going to be a cushion." The US government, meanwhile, is reduced to pleading with the banks that they at least spend a portion of the taxpayer windfall for loans - officially, the reason for the entire programme.
What, then, is the real purpose of the bail-out? My fear is this rush of dealmaking is something much more ambitious than a one-off gift to big business: that the Bush version of "partial nationalisation" is rigged to turn the US treasury into a bottomless cash machine for the banks for years to come. Remember, the main concern among the big market players, particularly banks, is not the lack of credit but their battered share prices. Investors have lost confidence in the honesty of the big financial players, and with good reason.
This is where the treasury's equity pays off big time. By purchasing stakes in these financial institutions, the treasury is sending a signal to the market that they are a safe bet. Why safe? Not because their level of risk has been accurately assessed at last. Not because they have renounced the kind of exotic instruments and outrageous leverage rates that created the crisis. But because the market will now be banking on the fact that the US government won't let these particular companies fail. If they get themselves into trouble, investors will now assume that the government will keep finding more cash to bail them out, since allowing them to go down would mean losing the initial equity investments, many of them in the billions. (Just look at the insurance giant AIG, which has already gone back to taxpayers for a top-up, and seems likely to ask for a third.)
This tethering of the public interest to private companies is the real purpose of the bail-out plan: Paulson is handing all the companies admitted to the programme - a number potentially in the thousands - an implicit treasury department guarantee. To skittish investors looking for safe places to park their money, these equity deals will be even more comforting than a triple-A from Moody's rating agency.
Insurance like that is priceless. But for the banks, the best part is that the government is paying them to accept its seal of approval. For taxpayers, on the other hand, this entire plan is extremely risky, and may well cost significantly more than Paulson's original idea of buying up $700bn in toxic debts. Now taxpayers aren't just on the hook for the debts but, arguably, for the fate of every corporation that sells them equity.
Interestingly, mortgage fund giants Fannie Mae and Freddie Mac both enjoyed this kind of unspoken guarantee before they were nationalised at the start of this crisis. For decades the market understood that, since these private players were enmeshed with the government, Uncle Sam could be counted on to always save the day. It was, as many have pointed out, the worst of all worlds. Not only were profits privatised while risks were socialised, but the implicit government backing created powerful incentives for reckless business practices.
With the new equity purchase programme Paulson has taken the discredited Fannie and Freddie model and applied it to a huge swath of the private banking industry. Again, there is no reason to shy away from risky bets, especially since the treasury has made no such demands of the banks (apparently it doesn't want to "micromanage".)
To further boost market confidence, the federal government has also unveiled unlimited public guarantees for many bank deposit accounts. Oh, and as if this were not enough, the treasury has been encouraging the banks to merge, ensuring that the only institutions left will be "too big to fail", thereby guaranteed a bail-out. In three ways, the market is being told loud and clear that Washington will not allow the financial institutions to bear the consequences of their behaviour. This may be Bush's most creative innovation: no-risk capitalism.
There is a glimmer of hope. In answer to Senator Corker's question, the treasury is indeed having trouble dispersing the bail-out funds. So far it has requested about $350bn of the $700bn, but most of this hasn't yet made it out the door. Meanwhile, every day it becomes clearer that the bail-out was sold to the public on false pretences. Clearly, it was never really about getting loans flowing. It was always about doing what it is doing: turning the state into a giant insurance agency for Wall Street, a safety net for the people who need it least, subsidised by the people who will most need state protections in the economic storms ahead.
This duplicity is a political opportunity. Whoever wins on November 4 will have enormous moral authority. It should be used to call for a freeze on the dispersal of bail-out funds, not after the inauguration but right away. All deals should be renegotiated, this time with the public getting the guarantees.
It is risky, of course, to interrupt the bail-out process. Nothing could be riskier, however, than allowing the Bush gang their parting gift to big business - the gift that will keep on taking.
Boris SobolevOctober 25, 2008
The severity and the speed of the crash which occurred in the precious metals stocks caught us and practically everyone by complete surprise. The meltdown surpassed everybody’s expectations and has no historical precedents.
However, when looking at the past 80-year history, there are a number of bear markets that carry some similar characteristics to the crash of 2008. The following six bear markets saw very significant corrections in mining stocks:
In 1929, there were no gold mining indices to speak of. The best indicator for the precious metal stocks was Homestake Mining, the biggest gold producer at the time. In the year of the crash, Homestake fell by just 30%. Other mining stocks fell by 50% or more. After the initial drop, gold stocks turned out to be the best performers. In that deflationary time, gold was as good as cash. In the following decade, which was marked by the Great Depression, Homestake rose by over 700%.
In 1939, precious metals stocks peaked together with the broad market. A severe bear market followed, lasting until 1942, as World War II raged on. In the course of 37 months, the newly formed Barron’s Gold Mining Index (BGMI) fell by 67.3%. A sharp rebound followed in 1943, as the epic Stalingrad battle was won and Allies made greater progress in winning the war. In the following 17 months, the index appreciated by 94%. However, it took about 20 more years for the BGMI index to overtake its 1939 highs.
The following major bear market happened in the 21-month period between 1968 and 1970 as gold stocks were digesting its huge gains made is the 1960s. The BGMI index fell by 61.2% but made a partial recovery relatively quickly, gaining 68% in 10 months. Thereafter, consolidation continued for two more years until a huge rally began in 1973.
Another major bear market occurred in 1975 / 1976, after impressive gains made in 1973/1974. Over the course of 24 months, BGMI fell by 68.4%. The index retraced less than a third of its losses in the following six months and remained range-bound for about a year and a half before embarking onto a gigantic rally which quadrupled the index in two short years.
After the 1980 peak in gold, a 19-month bear market ensued. The $XAU index fell by a deadly 77.4% from 1980 to 1982. But the rebound that followed in 1982 was equally impressive as mining stocks recovered almost all they lost during the previous bear market. In just 7 months into early 1983, gold stock indices tripled – one of the most impressive rallies of modern times. This is despite the fact that gold was then trading at a much lower level than in 1980.
The latest and the longest bear market occurred between 1996 and 2000. In the period of 55 months $XAU fell by 73.1%. It took five years for $XAU to return to its 1996 highs.
In the past year, the ultimate high for $XAU was 209.28 set on March 14 on the Bear Stearns developments. In July, $XAU made a double top, hitting 206.21. From this level to a low set on Friday of 63.52, the total decline is now 69.2% in just three months.
While a couple of major bear markets showed slightly greater losses than what we have today, the decline in the 2008 bear market occurred in the shortest span of time ever, making it into a crash of largest proportions and without any precedents over the past 80 years.
For the past few weeks, it has felt as if the bear market in precious metal stocks cannot get any worse. But it has gotten worse, worse and much worse. It has been as if the precious metals mining and exploration companies are all going out of business imminently.
Yes, it would be foolish to say that it cannot get worse from here. But both math and history are on our side. It is now very probable that a sharp multi-week rebound of at least 50% to 100% is near. The bigger question is how long will it take the $XAU and the juniors to climb back to its 2007/2008 highs. The $XAU would have to rise by 220%, while many juniors would have to rise 500%, 1000% or more.
From the above historical observations we can conclude that major gold indices such as the $XAU, $HUI, BGMI and others can recover to their prior highs very quickly, sometimes even in less than a year. We can expect this today as well especially if gold begins to climb higher. However, most juniors (which now number in thousands) will never see their prior peaks of glory. Many of them will go out of business, others will be acquired, others will merge. The entire junior stock landscape is going to be redesigned. But high quality, cash rich junior producers and explorers which sit on good deposits will undoubtedly have a bright future.
Kimmitt hinted he may have found some takers already: "We think that they are continuing to look very closely at opportunities in the United States. We have a number of cases before the Committee on Foreign Investment right now… Every investor that I've spoken with here and elsewhere had been in the United States within the past month, looking for opportunities.”
Who would have thought even three months ago -- besides your cranky editors of The 5, I mean -- that Wall Street would be holding a global garage sale this fall?
Last week, tax-hungry officials from the increasingly socialist countries of Germany and France declared another round in their long running war on Switzerland.
Their aim once again was against traditional Swiss bank secrecy, which the Franco-German politicians claim is little more than a cover for massive tax evasion. As usual, they didn't offer any proof for this claim.
Over several centuries and during two World Wars, peaceful Switzerland always has maintained its traditional neutrality. It's kept out of numerous wars involving both France and Germany, usually with the latter attacking the former.
The last time a war of sorts was declared against Switzerland was in George and Ira Geshwin's 1930 Broadway musical hit, Strike Up the Band. In the musical, the plot centered on a Babbitt-like American cheese tycoon who tries to maintain his monopoly on the U.S. market by convincing the United States government to declare war on Switzerland.
I suspect that the current effort by France and Germany will be just about as successful, (but much less entertaining), as Gershwin's spirited musical militarism.
Another Skirmish - Another Show!
Reacting to these renewed pressure from European Union officials, the Swiss government vehemently defended its tax system and its financial privacy.
This may look just like another episode in the decade-old, anti-Swiss political road show, but there's one new tactic. This time, EU cronies are using the current world economic disruptions as bogus proof that tax havens cause recessions! Please.
Tax-hungry politicians have repeatedly criticized Switzerland for its low taxation and banking secrecy laws. Biased critics claim that these laws provide European citizens with loopholes for evading taxes in their own countries.
Naturally, these anti-Swiss demagogues ignore the fact that Switzerland participates fully in the EU tax directive program. This means Swiss officials already collect taxes from foreign account holders and pay it to their home EU governments.
The most recent criticism coincides with a rapidly spreading global financial crisis that has prompted governments worldwide to spend billions of dollars to bailout ailing banks. With a recession looming in the U.S. and Europe, governments are grasping at any straw to stop a sharp fall in tax income.
Swiss Banks Don't Know the Meaning of the Word "Surrender"
Economists doubt, however, Switzerland will give up its banking secrecy or radically adjust its tax laws. They're saying the country is strong enough to defend itself against the EU's complaints. They note that Switzerland, as a member of the Organization for Economic Cooperation and Development (OECD), can effectively veto any decision by the OECD to blacklist it.
According to EU estimates, the world's tax havens, not including Switzerland, have attracted around US$5 trillion to US$7 trillion in assets because of low or nonexistent taxation. Swiss banks manage around US$4 trillion in assets, about 50% from foreign individuals and institutions.
At present, only three European countries (God bless them!) - Liechtenstein, Monaco and Andorra - are on the OECD's tax haven blacklist.
Paul O’Neill says he enjoyed being the 72nd secretary of the U.S. Treasury (2001 – 2002), even though the job lasted only 23 months. O’Neill, who has been analyzing the U.S. budget since he went to Washington, served in the Bureau of the Budget, which later became the Office of Management and Budget in the White House.
O’Neill came to American government in 1961 as a management intern, and stayed for 16 years through the Kennedy, Johnson, Nixon, and Ford administrations. The last 10 years of his tenure were spent at what was the Bureau of the Budget, which became the Office of Management and Budget. There he became deeply involved in the issues of fiscal policy, budget balance, budget making, and helping presidents choose priorities for how we spend the nation’s money.
Then he moved to the private sector in 1977. In 2000, he was asked by President Bush 43 to come back to the government and be the Secretary of the Treasury, which he did for 23 months before he got fired for having a difference of opinion.
Q: When you took over at Treasury, how would you characterize the financial health of the United States? Are you surprised at where we are today?
Paul O’Neill: When I moved into the Treasury as the 72nd secretary, what we inherited from the Clinton administration was an economy that had been rolling itself into a modest recession for a year and a half. By that time, the dot-com bubble had burst and the economy had slowed down, and we actually had some negative quarters that we didn’t really know about until Clinton was gone and Bush 43 was in charge. But on the fiscal policy front we were in a condition where we had, for the first time in a long time, a budget that was in surplus.
I have to hasten to add that while it was in surplus, it was not in surplus on a federal funds basis. It was only in surplus because the trust funds were bringing in a lot of money and together, with federal funds and the trust funds, the Clinton administration was able to claim three years of budget surpluses, which we hadn’t seen since 1969. That was a year where we were in budget surplus with the use of the trust funds. The last year I think that we were actually in surplus on a federal funds basis, without using trust fund money, was in 1960, so we’d been at this now for 47 years of basically living beyond our means – especially if you think federal funds ought to be in surplus without using the trust fund money to calculate balance.
So in 2001, when Bush 43 took over and I took over at the Treasury, we were in a total surplus condition, and arguably (I think this was a correct argument) we needed to reduce taxes because taxes had crept up to the point where something like 20 or 21 percent of the GDP was being effectively taken by federal government. Traditionally, our level has been someplace around 18 percent or maybe 18.3. So I think it was correct to say that we could afford to have a tax cut, which President Bush 43 had run on in the 2000 election, and he set out to deliver what he promised in the election and I think that was okay. The reason that I agreed to come in as Treasury secretary was because I saw lots of things in our economy and our society that needed to be done, and I was encouraged to believe that Bush 43 was up for the difficult political things that needed to happen to make course corrections. Those course corrections still include fixing the Social Security and Medicare trust funds, and fundamentally redesigning the way the federal tax system works. I thought there was some prospect that President Bush would entertain the difficult political choices that needed to be made in order to act on these things, and I spent a lot of time thinking about these things over a period, better part of 40 years, so I was anxious to have a go at it.
Q: How did it go?
Paul O’Neill: The first part was the easiest part. Cutting taxes is always a cinch – it’s only a debate about who gets the credit and how big the cut is. But then we had 9/11 and it really changed where we were. The economy was still slow, although we were actually having positive growth in the fourth quarter of 2001.
But there was still a lot of energy and President Bush himself was bringing this energy that we need additional tax cuts. I honestly didn’t think that was the right thing to do, because I continue to believe we needed the revenue that we were then collecting to work on the Medicare/Social Security problems. To work on fundamental tax redesign after 9/11 while worrying about whether there was going to be another attack or a series of attacks would cost hundreds of billions of dollars. So I was against further tax reductions at the time, especially as we got into 2002, as I became more concerned that we were also going to need money since it looked to me like we were sliding into a war with Iraq. I argued during the second half of 2002 we should not have another tax cut because we need the money to work on important policy issues that would shape the nation going forward, and we needed to have, in effect, rainy day money for the prospect of Iraq and another set of attacks like 9/11.
That was not a popular view, and in fact, it led to a conversation with the vice president where he basically told me, “Don’t worry about further tax cuts, it’s okay. Ronald Reagan proved that we don’t have to worry about deficits.” Which is really a shock to me because whatever you may think about Ronald Reagan, I don’t think he or anyone else has proved that it’s possible to ignore not just deficits, but federal debt as well. I think it is true that you can be sanguine about deficits for a short period of time, but you can’t be sanguine about mounting debt for the United States of America. When we, the Bush 43 administration took over, we had something over $ 5 trillion, maybe $ 5.6 trillion worth of national debt. Today [Fall 2007] I think the number’s $ 8.8 trillion. That’s not an innocent change, it is a monumental change in the debt service that we have to do in addition to and on top of all of the other things that our country needs to do.
Q: Toward the end of 2002, you wrote a report that said that the current debt wasn’t the problem; it was the debt that we are stepping toward. Shortly thereafter you were asked to leave. Can you explain to me what happened the day you were fired?
Paul O’Neill: During 2002 I found myself being at odds with where policy seemed to be going, I kept arguing that we couldn’t really afford another tax cut and that we didn’t need one, since the economy was doing fine. But my problems were not just differences about tax policy and social policy and fixing Medicare and Social Security. I kept asking almost every week, of the people from the CIA who briefed me, you know, where’s the evidence for weapons of mass destruction? I see all of these allegations and projections of trends from 1991 and what we knew in 1991, but I didn’t see anything I considered to be evidence. One of the things I’ve been trained to do for a long period of time is to know what you know and to differentiate that from what you suspect or what someone alleges, so I kept being a pain in the neck and asking, “Where’s the evidence? There’s no evidence, there’s nothing I believe.”
Early in the administration, at a National Security Council briefing, there were a bunch of photos put on the table and it was alleged that this satellite picture of what looked like a warehouse that you could find anywhere in the world was a production center for weapons of mass destruction. I said, I’ve spent a lot of time going around the world, producing goods all over the world, and have seen a lot of factories and warehouses. How can you tell me this one is a center for producing weapons of mass destruction? There’s nothing here that tells you that? You may assign it that, but there’s nothing here that tells you that.
One of the things I found really interesting out of this experience is that even today, people that I have a lot of regard for their intellect, like Bill Clinton, still say they believed the evidence was there. I’ve never had this conversation with him, but it’s hard for me to believe a guy who’s as smart as he is doesn’t know the difference between an allegation and evidence – especially someone who’s trained as he is as a lawyer. I’ve been astounded, this is a bipartisan thing – people on both sides don’t seem to get the difference between evidence and what they call intelligence, which I would call not intelligence, just a bunch of fabrications. So I was working my way to the margins of what endurance that people had for me, both in economic policy and in everything else I encountered. I have to admit some of the things that I said during this period probably ought to have been tempered. For example, we were struggling with trying to get the International Monetary Fund and the World Bank out of the business of effectively bailing out private sector lenders who’d given money to developing countries with the expectation that the people of the United States and other tax-paying people around the world would bail out the private sector lenders. I said (probably not very advisedly), “Before we give any more money to Argentina, we ought to make sure it’s not going to go to a Swiss bank account.”
Which was, I admit, not very diplomatic, but it was true – and interestingly enough, in a few weeks a guy who had been the president of Argentina said, without any prompting from me, “Well it was true he had money in a Swiss bank account, but it was all his own.”
So in any event, as we moved past the election in 2002 and we had this continued conversation, a really heated conversation with the vice president about what I considered to be the inadvisability of a further tax cut, I got a call, early in December. I was in my office having a meeting with a group of people and my secretary came in and said, “The vice president’s on the phone and would like to talk to you. The vice president said, “The president’s decided to make some changes, and you’re one of the changes. What we’d like to do is have you come over and meet with the president and basically say that you’ve decided to go back to the private sector, that you’re ready to quit your involvement with the Treasury.”
I said I didn’t think I needed another meeting with the president, thank you very much. I thought I’d had plenty of meetings, and I thought he probably didn’t need a meeting and I certainly didn’t need a meeting. And I also said to him, “You know, I’ve been going along now for 65 years or so and, you know, for me to say that I’ve decided to leave the Treasury to go back to the private sector is a lie, and I’m not into doing lies. And so what I want to do is issue a press release tomorrow morning before the markets open so that they’ll have time to digest this news in case it creates any stir. And I’ll send the president a note telling him I’m resigning.”
And I think he was surprised by that. He didn’t try to argue me out of it, I think probably because he’d known me long enough to know that it wouldn’t do any good, that I’d made up my mind and that was it.
Q: What did it feel like to get fired?
Paul O’Neill: Well, it’s a first in my life – I’d never been fired before, I’d only been promoted to ever-higher levels of responsibility. But it was okay with me because I would have really been uncomfortable arguing for policies I didn’t believe in. One of the things I actually said to President Bush and Vice President Cheney when they asked me to come and have lunch with them, and to ask me to serve as the secretary of the Treasury, was that I had reservations about doing this. And one of the reservations I had was that, having been the CEO of a very big corporation for 13 years and the president of a very big corporation for the period before that, I wasn’t sure how easy it was going to be for me to knuckle under when I thought the policy was wrong. The thing I didn’t know is how difficult it would be to knuckle under if you thought the policy was not well vetted, that it was decided on the basis of ideology instead of what was right for the country. At that point I really thought the decisions were not being made on the basis of what was right for the country, they were being made on the basis of what was right for getting reelected.
It’s probably altruistic, but I thought for a long time we need presidents who are so devoted to doing the right thing with and for the American people that they’re prepared to lose for their values and to hang their values out in public for everyone to see them.
Q: Let’s revisit the conversation that you had with Vice President Cheney prior to you being fired. Can you discuss the difference of opinion that you had in regard to tax cuts and deficits?
Paul O’Neill: Sometime after the election – it must have been mid-November – there was a meeting of the Economic Policy Group, including the vice president. As we sat at the table in the Roosevelt Room, we talked about where we were and where we were going. If I remember right, Glenn Hubbard made a presentation that was displayed on the screen at the front of the Roosevelt Room and showed where we were going and what different tracks looked like and GDP growth and the rest, including the effects of the proposed third tax cut. I made the argument, which I had been making over and over again since maybe June or July, that it was not advisable to have another tax cut because of the need to fix Social Security and Medicare and to have some money to smooth the fundamental redesign of the tax system. We needed to have in effect rainy-day money in the event that we had another 9/11 event – and at that point it looked like maybe we were going to go to Iraq, and it was not going to be cheap to do that.
So I argued that we should not have another tax cut because the economy was going to be in positive territory and doing okay through the next couple of years anyway without another tax cut, and there were all of these other compelling reasons not to risk a deficit and not to risk adding more to the national debt. And the vice president basically said, “When Ronald Reagan was here, he proved that deficits don’t really matter and so it’s not a consideration or a good reason not to have an additional tax cut.” I was honestly stunned by the idea that anyone believed that Ronald Reagan proved in any fashion, certainly not inconclusive fashion, that deficits don’t matter. I think it is true on a temporary basis that a nation can have a deficit and have a good reason for having a deficit. I think the Second World War there was no way we could avoid having a deficit, but when we came out of the Second World War we started running budget surpluses again and did that through the ’50s and into 1960. It’s interesting, it’s really only been in the last 40 years or so that we’ve accepted the notion that it’s a bipartisan thing that we don’t have to have fiscal discipline.
A year ago there was this signing ceremony in the Rose Garden for the new Medicare prescription drug entitlement, and it’s going to cost us trillions of dollars. This event was not unlike any of the others in the Rose Garden on a nice sunny day, with the president sitting at the signing table with a bunch of grinning legislators behind him taking credit for this “great gift” they’re giving the American people. But none of their money was going to get given to make this happen, because the federal government doesn’t have any money that it doesn’t first take away from the taxpayers.
There was no mention of the fact that this in effect was a new tax on the American people, and we didn’t know how we were going to pay for it. It was only grinning presidents and legislators taking the credit for a gift, which strikes me as a ridiculous continuing characteristic of how we do political business in our country.
Q: If we couldn’t afford it, why did we give it to the people?
Paul O’Neill: If you can get 51 percent of the people in the Congress to agree with the President’s leadership initiative to say we ought to do this, that’s all it takes. And I think it’s regrettably true there are a lot of people who don’t understand that when they get a gift from the American people, it’s from the American people and it can only be paid for with taxes over time. I think the confusion is aided and abetted by the fact that it doesn’t feel like we’re paying for it. It’s a lot like running up credit card debt: As long as you can pay the interest charges on your credit card debt, you can live way beyond your means. In fact, we as a nation are living way beyond our means, and for a period of time, there’s no doubt we’ve demonstrated you can get away with it. But I think we only need to look at the fate of other countries who’ve lived beyond their means for a long time to see you inevitably get into trouble.
If you look at Germany in 1923, they got to a point where their currency was so worthless that you needed a wheelbarrow to haul the currency that was needed to buy a loaf of bread. You get inflation where people stop investing in your national debt, when they say, “We’re not going to loan you money because you’re not going to be able to pay it back.” It’s the same thing that happens to individuals and families. When you get extended to the point that you can’t service your debt, you’re finished.
You know, so you go through a calamity – either you go through a terrible inflation, which is a way of having a national bankruptcy, and you destroy accumulated income and wealth, and in fact you have a taking from all the people because suddenly their financial assets are worth nothing. You know, are we going to have that right away? No. But should the people who are in positions of political leadership know that and anticipate it and do something about it for the American people, you bet – and now is the time to begin doing something about it.
One of the difficult aspects of this debt problem is that it’s not very transparent to people who are unschooled in fiscal and monetary policy. In a way, this problem’s a little bit like the famous example of if you throwing a frog into boiling water. If you throw him into the already boiling water, he jumps out right away. But if you put the frog in the pot of cold water and turn the heat on under it, the frog will let itself be boiled because it doesn’t respond to slow increase in temperature. Our debt problem is something like that. If we wait until we have a calamity and financial markets shut us off because we’ve exhausted their belief that we can service additional debt, it’s too late.
This is a problem that we need to deal with without letting the heat be turned up some more.
I would hope we can demonstrate we’re intelligent people that don’t wait until they create a calamity in their country before they deal with problems that are obvious to anyone who’s ever studied economic policy and fiscal policy and monetary policy. You only need to look around the world to see places like Argentina, Turkey, and Germany after World War II whose governments have effectively achieved a meltdown condition. Knowing this can happen to modern nations, we should not let it happen to ours.
Editor’s Note: The above was taken from the companion book to the critically-acclaimed documentary I.O.U.S.A. . Included in the book you’ll find interviews from some of the most revered voices in the nation, including Warren Buffett; former Treasury Secretaries Paul O’Neill and Robert Rubin; Pete Peterson, CEO of The Blackstone Group; Congressman Ron Paul (R-Texas); and bestselling Empire of Debt author Bill Bonner. Defiantly non-partisan, the empowering solutions outlined in these pages are a must-read for any American who wants to help change “business-as-usual” in Washington as a new administration heads towards the Oval Office.
Well, he's finally come right out and said it. Yes, he has.
Democrat presidential candidate, Barack Obama, speaking on October 23rd in Indianapolis, again attacked "big corporations" who use "tax loopholes" offshore - but he also made clear that he wants "to shut tax havens" down.
If you would like to hear the farthest Left member of the U.S. Senate advocate an end to tax havens, spoken in his own smooth baritone, click here, then click on "Listen Now."
Of course, Obama - who can draw 100,000 adoring Europeans in socialist-leaning Berlin - is not yet Dictator of the World.
He has no power, as yet, to ban tax havens worldwide or change the internal bank secrecy laws of sovereign nations such as Switzerland and Panama. But a President Obama could impose currency controls on dealings with selected countries, ban Americans from moving cash offshore, and even confiscate assets under emergency decrees and the nefarious PATRIOT Act.
The young Illinois senator has made crystal clear that high among his goals in an Obama Administration will be: 1) the curtailment, if not abolition of tax havens worldwide; 2) an end to all business and personal financial privacy; 3) automatic exchange of tax information among all national tax collectors; 4) nullification of bank secrecy laws, and; 5) public records of all hitherto private beneficial ownership of trusts, foundations and corporations.
Alexis de Tocqueville predicted Obama's ilk way back in 1835 when he wrote: "The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money." And so the New Deal motto has been revived: "Tax, tax, spend, spend, elect, elect."
It's highly likely that an entire generation of investors will never return to stocks again following the worst drubbing for equities in a single month since the spring of 1932.
It's also likely that many retirees will never buy another stock or mutual fund. And younger investors will probably shun stocks altogether because of the enormous losses suffered by benchmarks over the last 12 months - a major deterrent for new long-term investors planning for retirement or college.
Global stock markets have collapsed 25% in October - a record.
Since reaching an all-time high in October 2007, the MSCI World Index has crashed more than 45%, the S&P 500 Index is down 43% and the MSCI Emerging Markets Index is down a mind-boggling 65%.
These numbers are the worst annual returns for U.S. stocks since 1930 when the Dow plunged more than 33%. The spectacular loss of wealth, affecting both large and small investors alike, will deter investors from jumping back into stocks again for a long time.
But it's not just the huge declines over the last 12 months acting as a brick-wall deflecting long-term investment capital; U.S. and global stocks have been flat over the last ten years and adjusted for inflation have actually declined about 4% per annum.
Japanese stocks - mostly in the grip of a deflationary bear market since peaking in early 1990 - have declined 1% per annum since 1986.
Returns like those above don't exactly encourage long-term money-flows.
Mutual funds, exchange-traded-funds (ETFs), private equity funds and hedge funds have all failed miserably over the last 12 months. It's actually quite appalling that active money-managers didn't move more money into cash, Treasury bonds or apply hedges like reverse index ETFs or short-selling contracts, to protect their stocks.
Hedge funds get a big F, too. These guys are supposed to "hedge," but instead were mostly "leveraged" like hell and have been slaughtered since July. I'm not sure what these hedge funds are doing but it's certainly not hedging. Many deserve to close and many will.
As we move forward, investors must learn how to hedge their portfolios to protect against the next financial crisis - or possibly - the next phase of this bear market. That means using reverse index ETFs to cover your stock market exposure. This is a simple, cost-effective and liquid strategy that can protect your investments in a bear market.
For example, if you own stocks that you truly don't want to sell (tax reasons, great dividends, strong franchises, low prices, etc) then at least cover your exposure to neutralize your risk. Why mutual funds and hedge funds don't do this I'll never understand.
Let's suppose a portfolio has $100,000 invested in stocks; I suggest the same amount should be invested in reverse ETFs. At the very least, a one-for-one hedge should leave you flat or almost unchanged in a big market decline or rally. I did this starting in September for my U.S. managed accounts and since September 1st our portfolios have declined just 1% versus a stunning 35% loss for world markets. Sure, I'm still down 8% in 2008 but at least I won't have to work my way through a 40% draw-down like the benchmarks.
My only regret was not doing this sooner. Gold failed, gold stocks were massacred and high quality corporate bonds plunged. Only reverse indexing has worked to cushion the markets' mighty blow.
Japan's desperate £260bn bid to kick-start economy
Japan is to give emergency cash hand-outs to every household in the country regardless of whether they are rich or poor as a part of $260bn (£159bn) blitz to kick-start the world's second-largest economy and prevent a slide back into deflation.
By Ambrose Evans-Pritchard Last Updated: 9:50PM GMT 30 Oct 2008
Japan's desperate £260bn bid to kick-start economy Photo: REUTERS
The raft of measures comes amid reports in the Japanese press that the Bank of Japan is mulling a cut in interest rates from 0.5pc to 0.25pc as soon as today, chiefly aimed at curbing any further rise in the yen exchange rate after its spectacular increase since the summer. The futures markets are pricing in a 50pc chance of a cut.
"A harsh storm seen only once in 100 years is raging," said Japan's premier Taro Aso as he unveiled the spending plans in Tokyo.
The package includes payments of $600 for a typical family of four, as well as tax relief on mortgages, in the raft of measures worth $50bn, or roughly 1.2pc of Japan's GDP. It is the second fiscal package in two months.
The government is extending a further $210bn in loan guarantees targeted at small and medium-sized firms struggling to rasie money or roll over debts as the credit crisis bites deeper.
The talk of combined fiscal and monetary stimulus helped lift Tokyo's Nikkei stock index above 9,000, ending its seemingly unstoppable slide. The bourse is still trading at levels first reached in 1983 – a warning to the rest of the world of what can happen to equities once a country succumbs to debt deflation.
Japan held rates at zero for nearly six years in its decade-long struggle against deflation. When that was not enough it resorted to "quantitative easing", a technical term for what amounts to printing money on huge scale.
The Bank of Japan had hoped to nudge the country to normal rates over time but the violence of the global credit crisis has now brought the fragile recovery to a standstill. The economy began to contract in the second quarter. The trade ministry said industrial output is likely to fall 2.3pc in October, and 2.2pc in November.
Leading exporters Toyota, Honda, Sony and Canon have all slashed earnings forecasts, while the electronics companies Hitachi and Toshiba both reported a loss over the last three months. e_SClB"We think that Japanese rates will be cut all the way to zero again, most likely in January," said Mark Williams from Capital Economics. "We expect a return to deflation next year in the wake of the collapse in global commodity prices."
Japan remains the world's top creditor nation by far with a $15 trillion pool of savings and some $3 trillion in net overseas investments. The ups and down in Japanese sentiment can have a powerful effect on world markets.
A mixed army of life insurers, pension funds, and housewives with margin trading accounts, as well as foreign hedge funds, borrowed at near zero rates during the credit bubble to chase higher yields across the world, pushing up asset prices from Australia to South Africa, Brazil and Britain.
This yen carry trade – estimated at $1.4 trillion in all its forms – has now reversed violently as flight from global markets leads to yen repatriation. This has forced up the currency by almost 40pc against the euro and sterling since August, and by almost 50pc against the Australian dollar
Those playing the carry trade with high leverage have been caught in a brutal squeeze as margin calls force investors to liquidate assets. This in turn has pushed the yen even higher, setting off a vicious circle. The yen has fallen back this week as US rate cuts and swap agreements with emerging market economies help restore a degree of global confidence, but few in Japan are yet convinced the coast is clear.
Michael Taylor, from Lombard Street Research, said Japan had enough leeway to "turn on the fiscal tap" after pursuing a tight budgetary policy in recent years, but doubted whether the latest spending package will achieve much over time.
"Japan is clearly in recession so this will help," he said. "But you need continual, increasing doses to keep things going, otherwise its just a one-shot gain."